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Can I Utilize a Trust to Reduce Estate Taxes on My Home?

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Understanding Qualified Personal Residency Trusts

One type of trust which is common in estate planning is the Qualified Personal Residency Trust. Under this trust agreement, a couple can make a gift of their home to their children by placing it within an irrevocable trust. You have the ability to stay in the residence rent-free for what is called the "retained income period." At the end of this period, the property will be transferred to your children and you will need to pay fair market rent in order to continue to live within the residence. These rental payments can act to further decrease the value of an individual's taxable estate.

Qualified Personal Residency Trust Considerations 

The trust, if properly drafted, will decrease the value of the taxable gift made to your children and exclude any future appreciation of the residence from your taxable estate. This trust can be utilized in a strong real estate market with rising home prices to decrease the size of an individual's taxable estate and transfer any appreciation in value tax-free to the next generation. Certain considerations should be taken into effect prior to attempting to implement this estate planning technique. First, it is an irrevocable trust, so once created, it cannot be changed or revoked.

Second, after the retained income period, rental payments will be due in the amount of the fair market value in order to stay in the residence. Finally, an individual must take careful consideration of the costs involved to implement this strategy. Since the transfer of ownership of the personal residence to the trust is considered a gift, an appraisal of the residence must be performed in order to report that amount to the IRS. Additional fees, such as those for creation and maintenance of the trust and filing of pertinent tax forms will also need to be expensed.

If you would like additional information on whether this estate planning technique is proper for your estate, please contact our office for a consultation.

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